Water trading: how the world's most vital resource is up for sale

Like carbon trading, REDD and food speculation before it, the buying and selling of water is just the latest example of market principles being applied to natural resources. But just how ethical is it? Debika Ray reports

It was a sign of the times that the villain in the last Bond movie was not chasing diamonds or gold, but water. In the 2008 blockbuster Quantum of Solace, billionaire businessman Dominic Greene aimed to seize control of Bolivia’s water supply, and then instate his firm as the country’s sole supplier of freshwater. The plot — allegedly inspired by the 2000 protests against water privatisation in the city of Cochabamba — may have been implausible, but there was no refuting its central premise: water has become one of the world’s most precious substances.

'We believe water is turning into the new gold,' said Ziad Abdelnour, president of US private equity firm Blackhawk Partners, to Reuters last month. Indeed, a combination of climate change and a rising population is making the liquid increasingly unattainable – and, therefore, valuable. The total volume of water on earth is about 1.4bn km3, of which only 0.01 per cent is usable freshwater. Water use, meanwhile, has been increasing at more than twice the rate of population growth over the past century. By 2025, 1.8bn people will be living in regions of scarcity.

It is no surprise, then, that the impending water crisis has become a central preoccupation of academics, politicians and businesspeople. Of all the solutions mooted, the introduction of tradable water rights has gained traction in recent times. These schemes — under which parties buy or sell entitlements to water — already exist in such countries as the US, Chile, South Africa and Australia, with the market in the last of these worth an estimated $3bn. The UK looks to be heading in a similar direction.

But the proposals are controversial. While advocates believe applying market principles to natural resources encourages conservation and accurate pricing, critics question how well this operates in practice and the ethics of commodifying such as precious resource.

These proposals are part of a wider move towards using market mechanisms to tackle environmental problems, of which carbon trading is most famous. At present, water in most countries is publicly owned. To establish a trading scheme, rights to access it would have to be separated from land ownership and then allocated to private parties. Supply and demand would then determine price.

Privatising water

Institutions such as the World Bank have been interested in the idea since the mid 90s. In England and Wales, there have only been 55 such transactions over the past seven years, but Defra’s recent environmental white paper signalled reforms to the water abstraction system.

It is not yet clear what form these changes would take, but Claire Dinnis of the Environment Agency says the government is considering a 'better balance between regulatory and market mechanisms, of which trading may form a part.' She says reforms are necessary to ensure we cope with the pressures of the next 15-20 years. Another white paper will expand on this later this year.

The idea of privatising water may be unpalatable for some — not least because constrained supply and rising demand would inevitably lead to escalating prices. But Switzerland-based senior soft commodities trader Valerie Issumo says the price we pay for water now does not reflect its true value. 'Society insists water should be a public, freely-supplied good,' she says. The problem is, most states can’t afford to maintain water infrastructure anymore.'

Providing clean water costs money, she explains, and many governments subsidise this. She believes a market mechanism would be more cost-effective and transparent. She has devised an 'ethical' water futures market, which would involve those who generate waste water selling treated water to those — businesses, governments — who need it. Locally, this would be to parties near where it is sanitised; internationally, through goods produced using this water. Under this system, she says, the purchaser would gain procurement security, the vendor would secure an income and water would be treated.

Dominic Moran, environmental economics professor at the Scottish Agricultural College, agrees that water is too cheap. 'There is a misguided concept that water should be free,' he says. 'But someone has to extract it and treat it.'

Douglas Crawford-Brown, executive director of the Centre for Climate Change Mitigation Research at the University of Cambridge, picks up on the issue of treatment. Referring to the World Bank’s claim that 'free water is deadly water', he says reduced infant mortality is just one positive outcome of treating water. At present, one is six people have insufficient access to clean water.

Issumo agrees – indeed, she frames the global water crisis as primarily one of a lack of clean water, rather than water per se. 'There is enough freshwater for 10 billion people, but 90 per cent of waste water is not treated and a lot of the rest of it is not treated well enough,' she says. She believed focusing on this would go a substantial way towards ensuring there is enough usable water for all.

Crawford-Brown raises a pertinent issue, though: how can treated water be kept affordable? Trading might mean better quality, but this water may no longer be accessible to the world’s poorest.

Who pays?

Indeed, Dan Yeo, senior policy analyst at Wateraid, says the poor are often hardest to reach, so the price they pay may be disproportionately high.

Mary Ann Manahan, Philippines-based research associate at NGO Focus on the Global South, agrees: 'The expense of water could escalate and those who can’t afford it would have to fend for themselves.' She does not believe a market can accurately reflect the differing value of water for different regions. 'Subsidies for the poor are essential to ensure their minimum needs are met.'

Moran points out, though, that large businesses with high water use pay barely anything — demand-based pricing may mean they pay their way.

Another claim is that water trading would discourage waste. For example, if a farmer knew he could sell surplus water, he would be cautious about his use. Also the fact that a limited number of access rights would be issued in the first place should mean that water usage can be limited to a sustainable level overall.

Manahan is unconvinced, claiming the issue of efficiency is better tackled through existing methods. Singapore, for example, has developed a sophisticated water recycling system, while Hong Kong has separate pipe systems for treated and untreated water.

Yeo says there is no reason why a market would be better at pricing water than conventional means. The cost of creating these systems, for one thing, would be substantial. He believes governments should lead in tackling these problems.

Who wins?

Evidently not everyone is convinced. Indeed, the practical barriers to implementing trading systems are enormous. First, water is inconvenient to transport. Second, separating land and water rights is complex. Also, water does not stay still, which means rights would not equate to fixed amounts all year round and other parties — for example, people downstream on a river — would be affected by arrangements.

Then there are ethical considerations. Manahan questions the motives behind trading such a valuable resource, asking: 'Whose interests would such a system serve?'

With carbon trading, she explains, the big polluters – corporations, powerful governments – can best afford credits. With water, the same people would have the advantage. She is concerned about how international trading would be regulated. Would corporate interests and those of wealthy countries triumph, while those with informal rights are left vulnerable?

The impact of speculation is also a worry. Trading for financial gain is in its infancy, but shows signs of developing as investors wake up to water’s value. In 2007, US billionaire T Boone Pickens spent $75m on buying up water rights in Texas, from which he expects to recoup $1bn over 30 years. A year later, a Canadian hedge fund bought 95-year rights to three glaciers in northern Europe. Blackhawk Partners’ Abdelnour said in August that 'smart money' was moving towards water.

Manahan explains: 'Water is the perfect commodity — it’s inflation proof, there’s no substitute for it and it’s getting scarce. Countries go to war over it.'

Crawford-Brown says he would worry if speculation was unrestricted. 'When prices are torn loose from the physical item, the poor suffer most.' He says this should not be allowed, and that trading should be highly regulated. This, however, may be hard in countries without strong institutional capacity. 'In developing countries, how would rights be distributed, for example? What would happen after a change of government?' he asks.

Moran echoes this: 'We can’t think of systems that share out scant resources before creating the right institutions.' He is doubtful about the viability of trading globally, but sees no reason why it could not work within regions. He is certain the UK is heading in this direction.

While there is no concerted international push towards commodifying water rights, there is an undeniable enthusiasm for market-based solutions to all global problems. The debate in future is likely to revolve around the extent to which such systems are used and how they are regulated, rather than whether they are used at all.

But schemes such as those in Arizona, where municipal bodies agreed on transfers between regions, demonstrate that water rights trading need not be out of control — there is scope for exchanges within a strict regulatory framework. Indeed, some regions may soon have no choice.

NEWS ANALYSIS Banks should end 'secretive' trade in food commoditiesFinancial speculation in key commodities, like wheat and maize, is being linked to recent volatile food prices but attempts to regulate are being delayed by lobbying from the banking sector. Tom Levitt reports

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